BetaShares economist says RBA could slash rates to 2% if US enters recession

The Australian dollar and government borrowing rates fell after the Reserve Bank cut the cash rate 25 basis points, to 3.85%, on Tuesday and surprised the market with a dovish statement on monetary policy laced with concerns over geopolitical uncertainty. 

At a media conference after the decision, the bank's Governor Michelle Bullock declared the last couple of months a "complete rollercoaster" on the back of the US' erratic tariff war. However, Australia's central bank also trimmed its forecasts for core inflation to ease slightly to 2.6% by June this year and to stay at that level through to June 2027.

In response to the RBA's statement, BetaShares chief economist David Bassanese warned it could cut rates around another eight times to 2% or lower to support the economy if the US tips into a recession, traditionally defined by two consecutive quarters of negative gross domestic product growth. 

"The openness of the Trump Administration to lower tariffs in exchange for trade deals has been a major development in recent weeks, and should be enough to avoid the US tumbling into a serious recession," Mr Bassanese told investors. "But if the US does fall into recession, the RBA could easily cut rates into expansionary territory – as far as 2% or even lower."

For now, Bassanese has pencilled in two more 25 basis point rate cuts in 2025 to take the cash rate to 3.35%, assuming core inflation, stripping out volatile asset prices, drops from 2.9% to 2.6% as the RBA forecasts. 

Other views

Commonwealth Bank (ASX: CBA) has already announced it will reduce variable lending rates 0.25% for home loan borrowers and said the move will mean anyone with a principal and interest $500,000 mortgage will save around $80 a month.

Other economists weighed in on the RBA's decision to warn that it risks reigniting local inflation. 

"We have been saying for some time now that rushing into a rate cut prematurely runs the real risk of inflation resurgence," said VanEck Head of Investments & Capital Markets, Russel Chesler. 

"Much like a weed, inflation needs to be pulled out by the roots, or it may come back as a much bigger problem, requiring more effort than before to get rid of it. The Australian economy is in a good place at the moment, with unemployment at a historic low, and continued growth in the property market and retail sales."

Local investors pushed shares higher after digesting the news and RBA's latest views on the rate outlook. The S&P/ASX 200 (ASX: XJO) closed 0.6% higher at 8343 points with CBA shares advancing 0.6% over a session that saw them hit a new record high of $172.43.